Will quarantine-free flights send Delta's share price higher?

Delta Air Lines' [DAL] share price and other US airline stocks have seen a stronger recovery than their international peers. Delta's share price has rallied 79.84% since 23 March, while United Airlines has gained 72.65% and American Airlines has gained 39.22% in the same period (as of 1 December’s close).

The stocks continued to rally last week after Delta announced it will fly quarantine-free transatlantic flights in December. We look at what this means for Delta's share price in an unprecedented time for US airlines.

What “quarantine-free” flights mean for Delta's share price

Delta airlines are to run “quarantine-free” flights between the US and Italy in December. These are the first commercial flights between the US and Europe since March which will not require travellers to self-isolate upon reaching their destination, providing they test negative for coronavirus three times.

Quarantine flights will run from Atlanta to Rome, with passengers having to take a COVID-19 test 72 hours before boarding, at the airport before departing and again when they reach their destination.

European and UK passengers are still banned from travelling to the US from Europe. However, the Financial Times reports that the White House is considering lifting this restriction. Should this happen, Delta's share price could fly even higher.

Delta's share price gained 2% following the announcement.

What do Delta's business fundamentals look like?

The outlook for the airline industry is still bad, but not quite as bad as it was in March. Arguably, bargain hunters could still pick up Delta's share price at a discount — it’s trading 36.04% below its 52-week high of $62.48 (as of 1 December’s close). Just how much gain is left in Delta’s share price depends on how fast the airline can reduce losses.

In the third quarter, Delta reduced its cash burn to $18m a day in September, down from the $27m at the end of the second quarter. Net loss came in at $5.4bn, compared to a $1.5bn profit in the same period last year. Revenue dropped 76% to $3.06bn year-on-year, with warnings that revenue might not normalise for another two years.

Delta has a stated goal of reducing cash burn to between $10m and $12m a day in the fourth quarter, with a goal of breaking even in 2021. A lot will depend on persuading more passengers to fly again. According to CNBC, the Transportation Security Administration (TSA) screened 64 million people in the third quarter, up 150% from the previous quarter. While that figure is encouraging the year ago quarter saw the TSA screen 220 million.

“While our September quarter results demonstrate the magnitude of the pandemic on our business, we have been encouraged as more customers travel and we are seeing a path of progressive improvement in our revenues, financial results and daily cash burn,” said Delta CEO Ed Bastian in a statement accompanying the third quarter earnings.

"While our September quarter results demonstrate the magnitude of the pandemic on our business, we have been encouraged as more customers travel and we are seeing a path of progressive improvement in our revenues, financial results and daily cash burn" - Ed Bastian, Delta CEO

Where next for Delta's share price?

Analysts expect the fourth quarter to be another challenging period for the airline. Revenue is forecast to come in at $3.86bn, a 66.20% drop from the $11.44bn seen last year. Losses are pegged at $2.31 per share for the quarter, down from earnings of $1.70 per share last year.

As more routes open, Delta's share price could continue to gain. Yet shareholders will want to see Delta continue to reduce its losses in the fourth quarter. Any missed expectations could spell turbulence for the stock.

Among the analysts, Delta's share price carries an average $40.55 price target, which would see a 1.5% upside on the current share price. On the bulls’ side, the most optimistic target is $54, which would represent a 35.14% gain.

Delta's share price vitals, Yahoo Finance, 2 December 2020